Floating Exchange Rate

Floating Exchange Rate. A floating XR is where market forces determine the XR, that is, the XR is determined by the intersection of market demand and supply.

An increase in demand for the domestic currency means the demand curve shifts right and the XR appreciates. The domestic currency is worth more so more foreign currency can be bought for a unit of the domestic currency.

An increase in supply of the domestic currency means the supply curve shifts right and the XR depreciates. The domestic currency is worth less so less foreign currency can be bought for a unit of the domestic currency.